Kotak Mahindra Bank and ITC were the best outperformers against estimates till now in terms of profitability.

Q) Mutual funds data suggest that flows plunged 64 percent in April to the lowest in 31 months as investors turned risk-averse because of uncertainty related to the general elections. Inflows from systematic investment plans (SIPs) remain steady. Is this a temporary blip or do you think we could see more weakness?

A) Continued participation in SIPs indicates that stable broad-based equity participation continues. However, election-related volatility might have led mutual funds to increase their cash holdings in the short term.

According to our estimates, equity MFs currently hold around 4-5 percent in cash, which might be deployed post elections. Thus, we believe domestic institutional investor (DII) flows should recover after the current bout of short-term volatility.

Q) Where are the pockets of opportunities in these markets? Investors are dumping metals as well as oil and gas stocks. However, IT remains strong. Which are the sectors that are likely to hog limelight, post elections?

A) Once short-term uncertainty subsides, we believe that investors are likely to chase value. We believe that attractive levels are starting to emerge in the midcap universe and select opportunities should be explored in that space.

According to our valuation methodology, we see value currently visible in automobiles and ancillaries, midcap financials and construction sectors.

As the monetary policy turns more dovish and credit growth improves, we believe a higher nominal GDP should aid earnings revival, which might be visible, post Q2 FY20.

Q) Slowdown is visible in the market amid weak micro and macro data that have come out. Do you think market climbed the wall of worries to hit a fresh high last month – but that was more like an exaggeration? Have we entered the first phase of a bear market?

A) It is the case of either the glass is half full or half empty. If you look at sectors like cement, there have been signs of better realisation. Capacity utilisation is also slowly inching up. Inflation is expected to move up.

Most of the macro data have actually reached their historical bottom cycle levels and hence, the cycle should turn up, going ahead.

So, there are signs of recovery and we believe that broad markets have bottomed out and things are expected to improve from now on.

Q) One thing is clear – the euphoria is missing on Street in terms of elections. Q4 results have failed to surprise the analyst community. There are more stocks that have hit 52-week lows than highs. It was the same when the Nifty and the Sensex hit a record high last month. Is it time to go for the kill and deploy cash in case you are an investor for 5 years or more?

A) The broad market seems to have hit a trough in the current cycle as valuations are starting to bottom out relative to historical levels.

More than 50 percent of our broad market universe, made up of around 300 stocks, have reached the bottom 30 percentile of their historical valuations.

Such a level typically indicates greater than 15 percent CAGR return over the next 2 years. Also, as mentioned, a revival in nominal GDP would also lead to a revival in earnings growth, which would result in further value opportunities. Therefore, we see a good buying opportunity visible currently.

Q) Do you think that there is more pain in the beaten-down midcaps and smallcaps? What should investors do if their portfolio is still in the red? Will it recover post May 23, the election result day?

A) After correction, midcaps and small caps are starting to reach attractive valuation levels. The NSE Midcap market cap as percentage of core GVA has come down to just 44 percent in the March-end quarter, from the high of 72 percent in 2017. We think that investors should add them in their portfolio with every correction.

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